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Tesla Microeconomic Analysis (4)

Two of Tesla’s largest costs would include its cost of revenues (or cost of goods sold) and its operating expenses. The total expenses are almost split around half and half between these two, with the operating expenses being a bit more, as other costs are a low percentage that is almost negligible (for the company).

That the cost of revenues is such a high expense for Tesla, amounting to around 55 billion dollars annually as of 2022, is reasonable in that the production of its cars and other products would require a lot of raw material. Tesla is a manufacturing company, and thus it makes sense that manufacturing would be amongst its top priorities. (Tesla Cost of Goods Sold 2010-2022: Tsla) This is a variable expense, as it changes with the amount of goods sold because each unit of product requires its own production, packaging, and the like. Tesla is doing their best to and is able to make up for these costs, though, as it is able to sell its product for significantly more. Of course, there are always ways to improve on a product. One way Tesla could reduce these costs would be something they are currently working on- a battery that would reduce the cost of its product by recycling and reducing the amount of cobalt, which is one of the most expensive ingredients used in a battery.

Tesla’s operating expenses being high is also reasonable, sitting at around 64 billion dollars annually as of 2022. (Tesla Operating Expenses 2010-2022 | TSLA) This is because Tesla is such a large company- it owns hundreds of stores worldwide meaning it must pay rent as well as utility fees, it needs to pay its multitude of employees their due, and so much more. Many of Tesla’s factories can be classified as “gigafactories”. As its name implies, these factories are much larger than the norm, and can cost billions of dollars to construct and manage. Operating expenses can be both a variable and fixed cost- operating costs such as rent and wages for workers are fixed costs whereas operating costs such as utilities are variable. As far as I can see, Tesla is doing all that they can to control their operating expenses. They do not pay particularly high- indeed, any higher or any lower would likely not work out for the company.

We see that Tesla is capable of handling its expenses in that, from what we can see from its past trends, Tesla makes a large profit every year. In 2022, Tesla profited about 5 billion dollars, which is greater than its profit in 2021 of around 13 billion, which was again greater than the profit in 2020 of around 6 billion, and so on. These past trends show that Tesla is able to manage its costs and its profits will likely only rise in the future.

We also see that Tesla’s variable costs seem to be greater than its fixed costs as there are simply more variable costs. Indeed, the cost of revenues itself is telling of that, itself being 55 billion. The fact that Tesla’s variable costs exceed its fixed costs means that the company is making a consistent profit and has a consistent unit-cost. A steady profit margin means that the company has the ability to control their product (in areas such as price). This, in turn, means that the company will be safer in times of financial crisis such as recessions. This safety is beneficial in that not only will the company itself be safer during these times, but more investors would likely want to put their money into the company because of its relative security.


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